21 ways to reduce investment management fees

Transcription

1 21 ways to reduce investment management fees Getting value for fees paid

2 Having fun with things that are not important (and if you re only investing for fun it doesn t matter what you do) 2

3 Agenda 1. Overview 2. The importance of getting value for the fees you pay 3. Two ways to get a better net return ways to reduce investment management fees 5. Breaking down the cost of investment advice 6. Changes to look for when CRM2 becomes law in July Summary 3

4 Overview - The purpose of your investment portfolio " The real objective of wise investment management is to help you achieve your goals. In a goals based portfolio investments are simply a utility to help you reach your goals. " If a reasonable fee gives you greater certainty of achieving your goals then the fee is justified. " Any fee is too much if no value is received. " You determine if value is received by tracking performance compared to the target return necessary to achieve your goals and by comparing your results to an ETF benchmark. 4

5 The importance of getting value for fees paid " Assume you have a $1,000,000 investment portfolio. The following shows the long term cost of different levels of underperformance. " Underperformance: 1% 2% 3% 4% (per year in OOO s) " 5 years " 10 years " 20 years ,051 " 25 years ,401 1,721 5

6 The importance of getting value for fees paid " In my experience - over the long term you can expect a difference of about 2% per annum between a well managed portfolio versus a poorly managed / high fee portfolio. " Over 20 years, for a $1,000,000 portfolio, a 2% improvement in the average rate of return (for the same level of risk) makes a difference of over $500,000. " This is enough to make a significant difference in the financial security of most investors. 6

7 Two ways to get a better net return 1. Reduce fees and costs. All things being equal, if you reduce fees by 1% you increase pre-tax returns by 1%. 2. Increase the gross before fee rate of return. (Most investors can increase the gross rate of return (with no more risk) by focusing on the investment process rather than the investment products, by rebalancing according to a disciplined process, and by using best in class managers. 7

8 21 ways to minimize investment management fees 1. Ask for a discount 2. Use a buy and hold strategy 3. Use Exchange Traded Funds 4. Be a do-it-yourself investor 5. Use Robo Advisors 6. Use an investment counsellor firm 7. Be in a commission not a fee based account 8. Ask for a written description of all fees and costs 9. Avoid structured products 10. Understand performance fees 8

9 21 ways to minimize investment management fees 11. Don t be a frequent trader 12. Consolidate your accounts with one advisor 13. Know the TER (trading expense ratio) 14. Avoid balanced mutual funds 15. Avoid deferred sales charges 16. Avoid IPO (Initial Public Offerings) 17. Avoid Insurance Segregated Funds 18. Know how strip bond commissions are calculated 19. Consider consolidation to get premium pricing 20. Make your fees income tax deductible 21. Switch advisors 9

10 # 1 Ask for a discount " The best time to ask for a discount is when you are starting a new advisor relationship. Just bringing up the topic will let the advisor know you are fee sensitive. " Some financial advisors are willing to reduce stated fees but if you don t ask there will be no discount. " Fees are generally lower now than they were 10 years ago. If you ve been with the same advisor for a long period of time you should know that your advisor is probably charging a lower fee to new clients. 10

11 # 2 The buy and hold strategy " The buy and hold strategy will usually result in the lowest overall fees paid (assuming you are not in a wrap account). " A buy and hold strategy (for individual stocks) keeps you from selling high and buying low as you rebalance. " Over time, a buy and hold strategy (for a balanced portfolio) may become overweight equities and will therefore become a higher risk portfolio. " With a buy and hold strategy the payment of income tax on capital gains will be deferred. 11

12 # 3 Use Exchange Traded Funds (ETFs) " The ETF strategy is the second lowest cost strategy. Consider ETFs rather than high fee mutual funds for some investment mandates. " ETF returns will closely track the market great in a rising market - but costly in a falling market. " Over the long term most investors can expect a better result from an ETF strategy than from using high fee retail mutual funds or from using individual stocks that they choose or that their advisor recommends. 12

13 # 4 Be a do-it-yourself investor " DIY investors will pay less in fees than they would working with a full service broker. " Unfortunately many DIY investors focus on investment products not the investment process (and the investment process is more important than the investment products). " Few DIY investors lay out their strategy in a detailed Investment Policy Statement (IPS). Without an IPS investors are more likely to make bad decisions based on an emotional response. " Few DIY investors rebalance their portfolios in a disciplined way. " Few DIY investors are in goals based portfolios and therefore they take either too much or too little risk based on the return required to achieve their goals. 13

14 # 4 Do-it-yourself investing (continued) " Many DIY investors are over concentrated in Canada. " Many DIY investors are poorly diversified with only a few investment mandates. A well diversified portfolio would have six to eight different investment mandates. " No DIY investor is better at choosing Canadian equities than the best Cdn equity manager, and also better at choosing US Stocks than the best US manager and also better at choosing corporate bonds than the best bond manager, etc. " Most DIY investors will have better results if they focus on ETFs rather than individual stocks and bonds. " Many DIY investors would fire themselves if they compared their results with the proper benchmarks. 14

15 # 5 Use Robo-advisors " Robo-advisors are a class of financial advisors that provide online portfolio management services with minimal human intervention. Most Robo-advisors employ algorithms such as Modern Portfolio theory to rebalance ETF portfolios. " In Canada Wealthsimple, Nest Wealth and WealthBar are examples of Robo-Advisors. " With some advice and rebalancing - fees are higher than what a pure DIY investor using ETFs would pay but lower than going with a full service advisor using mutual funds. " Robo-advisors are licensed as portfolio managers and are therefore generally required to adhere to the fiduciary standard. 15

16 # 6 Use a Private Investment Counsel (PIC) firm " Fees generally range between.75% and 1.75%. Not as low as ETFs but lower than retail mutual funds. " PIC firms generally adhere to the fiduciary standard of care. " Most firms require a minimum investment of $500,000. " PIC firms usually follow a disciplined investment strategy. " PIC firms usually provide better reporting than provided from bank advisors or mutual fund companies. " No one PIC firm has the best Canadian Large Cap Equity manager, the best Canadian Small Cap Equity manager, the best International Equity manager, the best corporate bond manager, etc. 16

17 # 7 Pay commissions rather than being in a wrap account " There is no sense in paying an annual management fee on any positions that you do not plan to sell. " In a well managed account where the advisor follows a disciplined investment process there will be few transactions. So the cost of paying a normal commission per trade will be lower than paying an annual wrap fee. " If it is going to be an actively traded account the cost might be lower in a fee based account. 17

18 # 8 Ask for a written description of all fees and costs " When it is put in writing advisors are more careful about making estimates of fees and costs. " If advisors know that they will have to explain the fees in complicated structured products where fees and costs are hidden they will be less likely to recommend these high fee products. " Most investors don t realize what they pay in fees and costs but in July 2016, with CRM2 this will change. " Caution: If you ask for a written statement of all fees and costs you risk becoming an undesirable and you might be asked to take your account elsewhere. 18

19 # 9 Avoid structured products. " The highest fees and costs are usually found in structured products where there is a guarantee that you will at least receive a return of your capital. " Investors in well diversified goals-based portfolios have no need to pay for the expensive guarantees included as part of the structured product package. " If you are investing for the long term (retirement) it is usually unnecessary to pay the high cost of a guarantee to avoid the discomfort from short term market declines. " It s a mistake to pay a lot for a guarantee against market drops (before you need the money) if by living with short term fluctuations you ll have more when you do need it. 19

20 # 10 Understand performance fees " A performance fee is a fee charged by a fund manager for generating positive returns. The fee is usually calculated as a percentage of the return on the investment portfolio. " You need to know if there is a hurdle rate (below which performance fees will not be calculated). " Is the hurdle rate reasonable for the mandate that is being invested in? " You need to know the high-water mark. The highest NAV of a fund is known as the high-water mark. If the NAV of a fund declines during a year, no performance fee should be paid until the NAV reaches a new high. 20

21 # 10 Understand performance fees (continued) " You need to know if the high-water mark is perpetual or does it only last for one year. " You need to be aware that a performance fee can give an investment manager an incentive to take on more risk in an effort to get the performance to a level that will generate the extra fees not much to lose (for them) and much to gain. " Most investors would be wise to avoid managers who charge performance fees. 21

22 # 11 Don t be a frequent trader " Frequent trading is usually a sign that the investor is acting based on an emotional response rather than a disciplined investment process. " It would be unusual for market conditions to dictate a rebalancing more than once a year. " If proper due diligence procedures are carried out before choosing managers it would be unusual to make a manager change more than once per year. " It s been said that an investment portfolio is like a bar of soap the more it is handled the smaller it becomes. 22

23 # 12 Consolidate your accounts with one advisor " No need to have more than one advisor if your advisor: Follows a disciplined investment process Creates a goals based asset mix Provides an investment policy statement that provides sufficient detail for you to hold the advisor accountable Provides a proper performance report that compares actual results with the proper benchmarks Uses best in class managers rather than in house managers Does not buy and sell individual stocks (no advisor would continue to work as an advisor if he or she could consistently buy and sell individual stocks as successfully as a 1 st quartile professional equity manager). 23

24 # 13 Know your Trading Expense Ratios (TERs) " The Trading Expense Ratio (TER) is in addition to the mutual fund s Management Expense Ratio (MER). " The TER of a fund can be found on the SEDAR website. " The TER comparisons are most useful when comparing similar types of investment mandates. " The TER typically adds between 0.01% and 1% (average is about 0.15%) to the annual cost. 24

25 # 14 Avoid balanced funds (Fidelity example) " $200,000 in Fidelity Canadian Asset Allocation (70% stocks and 30% bonds) with MER of 2.48% the total fee for this balanced fund would be $4,960. " Compare this to: " $140,000 in Fidelity Global Growth with an MER of 2.50% the fee would be $3,500 plus " $60,000 in Fidelity Canadian Bond with an MER of 1.62% the fee would be $972. " For a total fee of $4,472 for Equity + Bond funds. " Total fee for the balanced fund is higher by $

26 # 15 Avoid Deferred Charge (DSC) Mutual Funds " Typical deferred sales charge is 6% declining to 0% in 5 to 7 years. " Commissions earned by advisors selling DSC funds is usually about 5%. " Problem is that the fund fees are high and investors are locked in and feel forced to stay with a fund even if it is underperforming compared to its peer group. 26

27 # 16 Avoid Initial Public Offerings (IPOs) " With an IPO investment advisors typically earn 5%. You pay this fee indirectly as it comes out of the proceeds of the offering that would otherwise go to the company. " In a recent article Matt Krantz (authored 5 investing books) explains that between 2 nd quarter of 2013 and the 1 st quarter of % of new IPOs fell short. " Investors may do better by avoiding the Initial Public Offering and buying the stock about a year later when it is usually cheaper. 27

28 # 17 Avoid Insurance Segregated Mutual Funds " Segregated Insurance Mutual Funds have some benefits including guarantees at death or at maturity, creditor protection and avoiding probate, and locking in market growth using resets. " But the fees are high usually over 3% per annum. " If the goal is to minimize investment management fees Seg Funds are not a good choice. 28

29 # 18 Know the basis for Strip Bond commissions " Strip bonds can be a safe and simple investment. " Strip bonds will be more volatile than regular bonds which pay interest annually. " Investors should be aware that when commission are charged on the purchase of strip bonds the commission is based on the maturity value not the purchase price. " If bonds are purchased in a commission based account the commission for $100,000 invested in strip bonds will be higher than the commission would be if the $100,000 was invested in regular bonds. 29

30 # 19 Consolidate to get premium pricing " Fund companies are being competitive to try to gather in more assets. " Examples: TD Premium and premium F Series If you invest a minimum of $100,000 you can save between 10 and 30 basis points. " Sentry Preferred Pricing Here they have expanded the definition of household to encourage consolidation within the Sentry Family of funds. 30

31 # 20 make your fees income tax deductible " MERs that are imbedded in mutual funds or ETFs are not immediately tax deductible by the investors because they are paid by the fund or ETF. " When fees are billed separately (as is the case with Investment Counsel firms) they are deductible in the year they are paid (if not related to a registered account). 31

32 # 21 Change advisors " Investment management fees are lower today than they were 10 or 15 years ago. " Most advisors opening up accounts today charge new clients a lower fee than they did 10 or 15 years ago. " If you ve been with an advisor for 10 or 15 years and the fee has not changed you might be able to get a lower fee simply by shopping around. " Remember the fee paid is not the most important thing getting value for fees paid is the important thing. 32

33 Breaking down the cost of investment advice These fee questions are relevant when considering using the services of an investment counsellor firm. 1. What is the cost of professional advice, financial planning services, portfolio design, rebalancing between managers, estate planning, etc.? 2. What is the cost of investment management? 3. How much will security transactions cost? 4. What are the operating costs of pools or investment funds? 5. What is the cost of custody? 33

34 Breaking down the cost of investment advice " For a $1,000,000 portfolio the range of costs might be as follows: " Advice Between.5% and 1% " Investment management Between.25% and.75% " Transaction costs Between.03% and.05% " Pool operating costs Between.1% and.3% " Custody fees Between.1% and.15% " Added together the total cost would likely be in the range of 1% to 2.25% (most likely fee would be about 1.35% per annum). 34

35 What to expect from Client Relationship Model Phase II " On July 15 th 2016 CRM2 comes into effect. As a result you will start to see details on annual charges and compensation including: " Deferred sales charges " Commissions paid " Trailer fees " Referral fees " Financial planning fees " HST on fees " Total fees paid on fee based accounts " Annual summary of charges as well as details of all compensation earned by your advisor 35

36 Performance Reporting with CRM2 " Investment performance report that shows investors how much they invested and what it is worth today deposits and withdrawals for past year and since inception of account their actual percentage returns for specified periods " Must provide money-weighted rate of return (net of fee/ charges) " 12-month period First reporting period must include July 15, 2016 " Account Rates of Return For 1,,3, 5 and 10 Years, and Since Inception " Change in Value of Account " Unfortunately still no requirement to compare results to the proper benchmark 36

37 Cost versus value " Oscar Wilde is quoted as saying a cynic is a person who knows the cost of everything but the value of nothing. " Wise investors will pay attention to fees but their primary focus will be on determining if value is received for fees paid. " Investors may focus too much on fees because fees are easier to understand than some other aspects of investing (following a disciplined investment process, rebalancing, comparing results to proper benchmarks, etc.) " Don t let an obsession with fees force you into an unwise investment strategy that may lower the net after fee return. 37

38 7 Steps to wise money management 1. Use a goals based approach to determining asset mix and take no more risk than is necessary to achieve your goals. 2. Focus on the investment process rather than investment products. 3. Rebalance when the asset mix breaches the acceptable range (as laid out in an investment policy statement). 4. Use ETFs or best in class professional active managers. 5. Insist on receiving performance reports with benchmark comparisons (so you know if value is being delivered). 6. If no value is being delivered look closely at the fees you pay because any fee is too much if no value is being delivered. 7. Have a financial plan that shows how things will work out in the long term. If you have more than enough - spend more or give it away because you can t take it with you! 38

39 Summary " Fees are important but after fee performance is even more important. " If you don t know how you are performing compared to the proper benchmarks you ll not know whether or not your are receiving value for the fees you pay. " Any fee is too much if you are not receiving value. " A reasonable fee is justified when the advice helps you achieve your goals and match the appropriate benchmarks. 39

40 Next steps: " Go to the following link and take the test. " If you fail the test call me or send me an Warren MacKenzie, CPA, CA " If I believe I can help I ll make a proposal which will (of course) fully explain all fees and costs! " If I cannot help I will refer you to people who can. Thank you 40

41 Thank You HighView Financial Group is comprised of the following legal entities: HighView Wealth Practices Inc. HighView Asset Management Ltd. Oakville - Corporate Office 77 Bronte Road, Suite 201 Oakville, Ontario L6L 3B7 (905) (888)